Dollar/yen falls more than 1 percent in nervous trade ahead of BOJ

TOKYO (Reuters) - The yen firmed in jumpy market conditions on Friday, spiking to a 2 1/2-week high against the dollar as investors braced for the possibility that the Bank of Japan's expected easing steps will disappoint market participants hoping for more radical measures.

The dollar was down 0.5 percent at 104.76 yen <JPY=>, after earlier skidding as low as 103.30, its lowest since July 12, as stop-loss orders were triggered in thin market conditions, by what some market participants speculate might have been a trading mistake. It was on track for a weekly loss of 1.4 percent.

Overnight dollar/yen implied volatility surged above 50 percent <JPYONO=> on Thursday, its highest since the depths of the financial crisis in late 2008.

The euro was buying 116.07 yen <EURJPY=>, down 0.4 percent, and 0.4 percent lower for the week.

The BOJ usually announces its policy decisions around noon in Tokyo (0300 GMT), although the bank does not set an exact time.

A sizable increase in bond purchases, combined with an expansion of risky assets such as exchange-traded funds (ETF), would be the most likely option if the BOJ wants to shock markets with a large-scale easing, according to sources familiar with the bank's thinking.

She added that the BOJ's actions were unlikely to include measures to accelerate inflation to hit the 2 pct inflation target.

"Whether the bank moves or not, the bank's decisions are likely to increase volatility" in foreign exchange, fixed income and equity markets, she said.

Under heavy government lobbying, the BOJ is considering specific steps for expanding monetary stimulus to address signs of weakness in inflation, the sources said.

Data out on Friday underscored the downward pressure on prices. Japan's core consumer price index fell 0.5 percent in June from a year earlier, compared with economists' median estimate for a 0.4 percent annual gain.

On Wednesday, the Japanese government unveiled a surprisingly large 28 trillion yen ($267.58 billion) stimulus package, firmly placing the stimulus ball in the central bank's court.

Sources told Reuters on Thursday that the government package contains direct fiscal spending of only 7 trillion yen, which is likely to disappoint investors hoping for bigger outlays given the large headline figure.

The dollar index, which measures the U.S. unit six major peers, was down 0.2 percent at 96.585 <.DXY>, poised to lose 0.9 percent for the week.

Thursday's economic data also weighed on the dollar. A wider-than-expected $63.3 billion U.S. trade deficit on goods in June and an unexpected rise in new unemployment claims last week both added credence to the U.S. Federal Reserve's decision on Wednesday to leave policy on hold.

Investors will await the U.S. government's initial reading on second quarter gross domestic product later on Friday. The economy was expected to expand at an annualized 1.8 percent, the Atlanta Federal Reserve's GDP Now forecast model showed on Thursday.

The euro edged up 0.1 percent to $1.1083 <EUR=>, up 1 percent for the week.